Britannic focus of fears over insurers' solvency

The Britannic Group bore the brunt of spiralling solvency fears in the insurance sector yesterday after another nervous day in equity markets heightened concerns over its capital strength and sent its shares down as much as 17 per cent.

A negative note from analysts at Goldman Sachs on Britannic, which issued a profits warning earlier this month and has suspended its dividend, sparked several large sells in the group. Shares closed down 13 per cent at 115p.

Hedge funds are thought likely to be circling the company as an ideal target for short-selling, the practice which allows them to profit from a fall in the company's share price.

"There were two big sells of Britannic shares in one go yesterday, of 250,000 and 50,000," said one analyst. "There is no reason for anyone to buy these shares and the price will continue to drift. Hedge funds will plunder the opportunity."

Britannic's woes are also compounded by the make-up of its shareholders, a number of which are income investment funds that invest in companies to reap their dividend payment. As Britannic has told shareholders they are unlikely to see a dividend this year, many of its investors, such as HSBC and Invesco, will be forced to sell out of the group.

Fitch, the ratings agency, yesterday reiterated the concerns that the continued decline in equity markets, in which insurers invest a substantial proportion of their assets, is putting pressure on their ability to meet regulatory solvency margins.

Britannic recently said it can withstand a fall in the FTSE to 3,300. Most analysts, however, believe Britannic is struggling no more than other insurers and it has already taken bold steps to ease the strain on its capital. The FSA revealed on Monday that it is seeking assurances from several companies that they are acting to protect their balance sheets.

Fitch estimates that insurers' free asset ratios – the amount of surplus capital they have – will be around 6 per cent. The FSA requires a 4 per cent margin to maintain regulatory solvency.

The only bright note in the sector yesterday was news from Friends Provident that sales of life insurance and pensions products grew 10 per cent in 2002, double the growth expected. But Keith Satchell, chief executive, warned that new business figures for 2003 would be slow in the face of a fall off in investor confidence.